James Pethokoukis

Politics and policy from inside Washington

Not winning the future: more on Obama’s strange ATM comments

Jun 22, 2011 12:30 UTC

My pal Russell Roberts of George Mason University speaks Economic Truth to Political Power as he dismantles Obama’s weird comments that ATM machines and automation kill jobs (via the Wall Street Journal):

Replace workers with machines in the name of lower costs. Profits rise. Repeat. It’s a wonder unemployment is only 9.1%. Shouldn’t the economy put people ahead of profits?

Well, it does. The savings from higher productivity don’t just go to the owners of the textile factory or the mega hen house who now have lower costs of doing business. Lower costs don’t always mean higher profits. Or not for long. Those lower costs lead to lower prices as businesses compete with each other to appeal to consumers.

The result is a higher standard of living for consumers. The average worker has to work fewer and fewer hours to earn enough money to buy a dozen eggs or a pair of shoes or a flat-screen TV or a new car that’s safer and gets better mileage than the cars of yesteryear. That higher standard of living comes from technology. It isn’t just the rich who get cheaper TVs and cars, plus the convenience of using an ATM at midnight.

Somehow, new jobs get created to replace the old ones. Despite losing millions of jobs to technology and to trade, even in a recession we have more total jobs than we did when the steel and auto and telephone and food industries had a lot more workers and a lot fewer machines.

Why do new jobs get created? When it gets cheaper to make food and clothing, there are more resources and people available to create new products that didn’t exist before. Fifty years ago, the computer industry was tiny. It was able to expand because we no longer had to have so many workers connecting telephone calls. So many job descriptions exist today that didn’t even exist 15 or 20 years ago. That’s only possible when technology makes workers more productive.

Indeed, American needs to focus more on increasing productivity through innovation. And then means better tax, regulatory, education and immigration policy. And as this chart from McKinsey shows, we are headed in the wrong direction in many areas:

Why Washington should embrace innovation prizes

Jul 30, 2010 18:40 UTC

Innovation prizes put space tourism on the launch pad and helped Netflix better predict consumer movie preferences. Now they might even improve oil spill cleanup. Government should join in, too. In austere times, such rewards would be an efficient way for cash-strapped Washington to fund breakthroughs that drive economic growth.

Competitive prizes do have a successful history. In 1714, the British Parliament offered a £20,000 prize for anyone who could devise a way for sailors to accurately determine a ship’s longitude. It was eventually won by an English carpenter. In 1927, Charles Lindbergh won $25,000 from hotelier Raymond Orteig for his nonstop flight from New York to Paris. The $1 million Netflix Prize was decided in 2009 after a competition involving teams from more than 100 countries.

It was Lindbergh’s historic feat that inspired astronaut wannabe Peter Diamandis to start the X Prize Foundation in 1996. Its first award was pinned to space flight in 2004, and the organization has started a new one in response to the BP oil leak in the Gulf.

What attracted Diamandis to prizes is how they create leverage. Competitors for the Orteig Prize raised and spent some $400,000, while X-Prize teams poured in $100 million in the hopes one would win $10 million. Spending more than the actual prize money on offer enforces economic discipline, as it means the innovators need to consider a back-end business application to recoup their funds.

The first X Prize was financed by an insurer betting against its success. Scrounging up the dough for what Diamandis calls “mega-prizes” in the $100 million-to-$1 billion range would be even tougher. That’s where government can pitch in. Washington already dabbles, especially for defense research. But their use could be greatly expanded.

In the U.S., Congress should start by passing a bill now under consideration that would authorize all federal departments and agencies to use prizes. It’s supported by the White House, even though President Barack Obama was sort of dismissive of prizes during his campaign. (Back then, he didn’t think much of John McCain’s plan for a $300 million prize to create advanced battery technology.) But one of his top science advisers is Thomas Kalil, a big advocate of the idea.  And the administration has incorporated the concept into its national innovation strategy. Eventually the government could even finance “grand challenges” such as developing self-replicating nanotechnology machines or faster-than-light communications.

The key is to focus on areas where there is an identifiable market failure, or where success seems near impossible. If history is a reliable guide, private money could outmatch public expenditure by 10-to-one. That is an opportunity penny pinching politicians anywhere would be silly to pass up.

How to grow the U.S. economy

Jun 21, 2010 15:11 UTC

Andrew Liveris, chairman and CEO of Dow Chemical, has some ideas, which he outlines in a USA Today op-ed. Here is an excerpt followed by my take:

1. New infrastructure that leverages private investment in plant and equipment, and modernizes our nation’s communication networks, electric grids and air, sea and land transportation systems. [Me: I am not sure we need $2 trillion in fixes like civil engineers contend, but this is a proper role for government.]

2. R&D that’s cutting edge. The experiences of competing countries demonstrate that R&D investment leads to greater economic growth, worker productivity and higher standards of living. [Me: Sure, businesses love tax credits and subsidies to do research, but there is very little economic evidence that government can do much to directly affect innovation beyond creating a fertile climate.]

3. Education that leads the world. The U.S. needs to enhance student skills in science, technology, engineering and mathematics, where we widely lag global competition. [Me: I certainly don't think this is a money issue. Here is a great article in the NYTimes about how better classroom management skills have a near-miraculous impact of student achievement.]

4. A “pro-trade” policy that creates a “level playing field” with limited tariffs and barriers to entry. The U.S. should adopt pending trade agreements such as Doha, which ensure that same treatment with key foreign partners — reciprocal market access to enable free and fair American participation.  [Me: Agreed. Subjecting your country to maximum competitive intensity will boost innovation and growth.]

5. An alternative energy strategy that will secure the abundant energy that industry needs to stay competitive. Energy is the lifeblood of U.S. manufacturing, but we have no comprehensive policy to support it. We should become far more efficient in its use, seek lower carbon alternatives and, with proper safeguards, expand traditional supply. [Me: Not sure what this mean in practice.]

•Regulatory reform is required for U.S. manufacturing, especially as concerns the environment. Regulation is necessary, but smart regulation isn’t always practiced. All too often, we see rules that bog down product innovation or that lack a solid scientific basis. [Me: Yes. If  America needs a czar, it should be someone to looks at bad regulations.]

6. U.S. tax policy should support manufacturing, not militate against it. Our corporate taxes rank second highest among countries that belong to the Organization for Economic Cooperation and Development, and are only going up. The House’s jobs bill will raise taxes $80 billion on U.S.-based corporations and small employers. Next year, taxes will rise on capital gains, dividends and small businesses. Also, the U.S., unlike every other major OECD economy, taxes on a worldwide, not territorial, basis. [Me: Agreed.]

7. Reform in civil justice is needed to support advanced manufacturing and end lawsuit abuse. In the U.S., unlike other OECD countries, plaintiffs’ lawyers unduly burden corporations with demands for compensation disproportionate to their client’s injuries, or even when there’s no injury. [Me: Agreed.]

Bill Gates’ Big Government plan for clean energy ‘miracle’

Jun 14, 2010 15:26 UTC

Bill Gates and a bunch of other top corporate executives want Uncle Sam to spend a lot  more on clean energy research and development. Here’s why:

Energy innovation is a commitment to long-term prosperity. If the United States invests in its clean energy future now, our nation can reap immense benefits. We have seen this work in other sectors, and it can work in energy. Public- and private-sector innovators have made miracles happen right here on home soil—Americans developed the computer and the Internet, delivered air and space travel and decoded the human genome. Standing on their shoulders, we can see a clean energy future within reach. By scaling the good technologies of today and discovering new technologies that do not yet exist, we have an opportunity to achieve a similar miracle in energy.

So they have created a new group to push their agenda, the American Energy Innovation Council. Here are some of its members:

Norm Augustine, former chairman and chief executive officer of Lockheed Martin; Ursula Burns, chief executive officer of Xerox; John Doerr, partner at Kleiner Perkins Caufield & Byers; Bill Gates, chairman and former chief executive officer of Microsoft; Chad Holliday, chairman of Bank of America and former chairman and chief executive officer of DuPont; Jeff Immelt, chairman and chief executive officer of GE; and Tim Solso, chairman and chief executive officer of Cummins Inc. The Council is advised by a technical review panel consisting of preeminent energy and innovation experts and is staffed jointly by the Bipartisan Policy Center and the ClimateWorks Foundation.

And group has five big recommendations:

1) Create an independent national Energy Strategy Board; 2) Invest $16 billion per year in clean energy innovation (vs. $5 billion currency); 3) Create Centers of Excellence with strong domain expertise; 4) Fund the Advanced Research Project Agency-Energy at $1 billion per year; 5) Establish and fund a New Energy Challenge Program to build large-scale pilot projects.

And this is how they plan to pay for it:

When there is a system to reduce greenhouse gas emission in the United States, it will likely generate revenue—in the form of permit sales, for example. The first $16 billion of these greenhouse gas revenues should be devoted to RD&D— because new technologies will make it far cheaper to reduce emissions. This is a virtuous cycle. The United States employs other user fees on the energy system today that could be expanded. Wires charges (a small fee on electricity sales) are a natural way to finance improvement in the electric sector, just as gasoline taxes pay for transportation infrastructure. Reducing today’s subsidies to fossil fuel industries could also cover much of the distance.

Me: Why, exactly, do they think this will work? Granted, when you are talking about trillion dollar deficits, this is not a great deal of money. So maybe it is worth taking a flyer. But the evidence would indicate it is a long-shot at best. A 2003 OECD study on what drives economic growth in advanced economies found “no clear-cut evidence” that government R&D — as opposed to private sector R&D — provides any economic benefit.

What does boost economic growth, according to that study? Avoiding this scenario, for one thing: “For example, high personal income tax rates can discourage entrepreneurship since entrepreneurs are self-employed and/or managing unincorporated businesses, whose profits are taxed through the application of a progressive rate schedule to personal income.”


Just to throw the conspiracy cookie in here: why do you think private industry would not stifle creative clean energy research as they have for the last 80 years? This is why government-sponsored research, with appropriate oversight, through private contractors could yield better results than a straight-up free market program.

Of course the interference could always be done (as it is now, also) through lobbying efforts, but it’s much easier and cheaper to buy competitors than congressmen.

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Cocky CEOs have more innovative companies

Jun 2, 2010 17:27 UTC

That is the conclusion of this paper, “CEO Overconfidence and Innovation,”out of the University of Toronto:

In this paper we study the relationship between CEO overconfidence and innovation. We use a simple career concern model to show that CEO overconfidence can increase innovation. The model also predicts that the impact of overconfidence will be stronger when product market competition is more intense. We find strong empirical support for these predictions.

In particular, overconfident CEOs obtain more cite-weighted patents, and this effect increases with product market competition. These findings suggest that overconfident CEOs are more likely to initiate a significant change in their firm’s innovation strategy. … Our findings are complementary to those in Aghion,Van Reenen and Zingales (2009). While they show that institutional ownership encourages innovation by reducing the likelihood that a CEO is dismissed after a decline in profits, our results show that overconfidence encourage innovation by reducing the CEOs internal beliefs about the likelihood of failure.

Can Obama spend US back into prosperity?

Sep 22, 2009 18:07 UTC

Presidents, particularly Democrats it seems, love to try and attach catchy titles to their agendas. FDR’s New Deal and JFK’s New Frontier made for powerful branding. Bill Clinton’s New Covenant, not so much.

Barack Obama seems to be going with “New Foundation,” the title of a big-think economy speech from last spring. As the President said back then with biblical flair: “We cannot rebuild this economy on the same pile of sand. We must build our house upon a rock. We must lay a new foundation for growth and prosperity.”

As a follow up, the White House’s National Economic Council, headed by Lawrence Summers, just released a new white paper that fleshes out how the administration plans to create that “new foundation.” In a post on the official White House blog, Summers says the government needs to take an active role in strengthening America’s “economic ecology.”

But let’s examine the diagnosis before we turn to the prescribed treatment. The most important statistic for analyzing a nation’s economic strength is worker productivity. And since 1995, U.S. worker productivity has increased at a terrific annual rate of about 2.6 percent.

But is that somehow a phony number, a mere derivative of the equity and housing bubbles? The White House doesn’t seem to think so. As economic adviser Jared Bernstein told me recently, “There is nothing that’s changed in the basic underlying productivity and strength of the American workforce and the American economy. [Productivity] remains in that kind of post –’95, elevated, 2 ½ percent range.”

In other words, Obama actually inherited an economy with a pretty solid foundation, though clearly one with some cracks. And don’t forget that despite the financial crisis, the World Economic Forum still recently ranked the American economy as the second-most competitive in the world, far in front of major competitors such as Germany and France.

The key, then, is to build on America’s existing strong foundation of innovation-driven productivity. Summer’s NEC makes a variety of recommendation such as increased government investment in education, infrastructure and basic research. And as long as that spending is limited to the “building blocks” of economic growth as opposed to picking winners, Uncle Sam might actually do some good here.
Unfortunately, the White House has been picking winners in a sort of an ad hoc industrial policy. Maybe the banks were too big too fail, but GM and Chrysler?

And why should the tax code continue to favor the housing sector? Is building bigger homes and vacation getaways the best use of American capital? Yet there is little evidence the White House plans on changing that sector’s privileged position.

And the President continue to favor the idea of high-speed rail, a favorite of unions and green activists, despite numerous studies questioning the economic benefit of such a system in the vast, spread-out United States.

The administration also seems to be making a bet that higher taxes on small businesses, investment and higher incomes will have limited or no negative effect on the nation’s entrepreneurial climate.

Finally, any productivity guru will tell you that perhaps the most important thing a country can do to boost innovation and economic efficiency is keeping markets open. Or to use the favorite phrase of Diana Farrell, former director of the McKinsey Global Institute and now a Summer’s deputy at the NEC, “creating maximum competitive intensity.” Obama’s tire tariff doesn’t seem to qualify as a pro-innovation measure by that standard.

So by all means, repair some bridges and spend more bucks at federal labs. But innovation and productivity involve a whole lot more.



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